Since the global financial crisis, we have witnessed a rapid rise in the number of alternative lenders entering the market — in particular, the introduction and increased popularity of peer-to-peer (P2P) lenders. The surge in P2P lending is not unique to the British property market and we have seen significant growth of this sector in Europe, Asia and the US.
P2P lenders offer an approach to property investment similar to that of crowdfunding; for those looking to invest relatively small amounts, P2P lending is very accessible, with investment amounts as low as £500. Furthermore, by offering individuals the chance to invest proportionally smaller sums of capital, investors can theoretically spread risk across multiple loans. Some P2P lenders also promise investors returns of around 12%, which is far more attractive than the sub 1% interest received on many standard savings accounts.For borrowers, peer-to-peer lending offers an alternative to traditional lending and was particularly attractive following the global financial crisis, which saw many traditional lenders batten down the hatches.
One such P2P lender promising 12% returns was the British property finance company Lendy, which went in to administration in May 2019. Lendy’s demise is believed to have cost retail property investors tens of millions of pounds and it has £160m in outstanding loans, £90m of which, have been reported to be in default. Although Lendy is not the first or only P2P lender to collapse, the scale and impact of its fall certainly received the most publicity, sparking industry concerns of the sustainability of P2P lenders.
The sector’s approach to securing new investment has been widely criticised with some contesting that investors are not sufficiently informed of the risks of their investment nor do they have the expertise and experience required to make investment decisions without having sought professional advice first.
Indeed, the sector’s low barrier of entry and ease of access, attracts a wide range of investors all with different levels of investment experience. In June, the Financial Conduct Authority (FCA) responded by announcing new rules to better protect future investors. From December 2019, P2P lenders will be required to ask investors that have not received financial advice a series of questions to ensure they have the knowledge and experience to invest. New investors will also only be able to invest a maximum of 10% of investible assets. It is hoped that the rules will deter inexperienced investors and ensure those deemed suitable are truly aware of the risks.
“Over the past few years the Allsop receivership team has seen that when borrowers from mainstream lenders needed to refinance, P2P lenders have been an important source of funds”
However, this crack down may have a significant knock-on effect on the lending market. Economic uncertainty over the last decade has already impacted small and medium-sized businesses (SMEs) with many struggling to obtain finance via traditional high street lenders because of stricter lending criteria and a lack of appetite for risk. As a result, many SMEs have turned to alternative financiers, like P2P lenders.
A lack of confidence in the P2P market, and a clamp down on the number of eligible investors following the introduction of this suitability test, may have a serious impact on the finance available to small businesses.
What will the implications be for the property market if P2P reduces its market share or disappears altogether?
One of the services that the Allsop receivership team provides is pre-receivership advice. Over the past few years we have seen that when borrowers from mainstream lenders needed to refinance, P2P lenders have been an important source of funds. SME’s make up 99% of all private sector businesses and over half of all employment in the UK — if they are struggling to access traditional finance and their plan B is less accessible, what will the implications be? Will high street banks be pressured to increase their presence again or will challenger banks continue to build their market share?
It is true that as high profile as Lendy’s collapse has been, there have been only a few such examples in Europe; Collateral and TrustBuddy, to name a couple. Long standing P2P firms such as Zopa and Funding Circle are still going strong and while savers continue to be hit by low interest rates, P2P platforms are likely to continue to be an attractive investment. Could this new regulation help to boost confidence in the sustainability of P2P firms and drive further growth instead?
A demise of this popular sector could have far reaching implications and, in these times of political and economic uncertainty, businesses will need all the help they can get to stimulate wider investment and growth. Without this, is the keenly anticipated “Boris Bounce” that the property market has been hoping for possible?